Thailand's much-vaunted financial restructuring package was unveiled yesterday, and reactions were somewhat positive since the government has finally laid down a definite legal framework for the rehabilitation of financial institutions, although top policy-makers remain ambiguous about the size and cost of bailing out the entire financial system.

''The policies look good, yet foreign investors would like to take some time to see whether the execution of the policies will bring results," an analyst from Morgan Grenfell Securities (Thailand) Ltd said. ''There might not be a sudden return of foreign capital inflow at the moment, but there won't be a sudden outflow, too."

Nikhil Bhati Srinivasan, chief representative of Morgan Stanley Asia Ltd, welcomed the massive budget cuts, which he said showed that the Thai government was doing its best to meet the IMF's conditions. ''It is also a good policy to allow foreign financial institutions to hold major stakes in Thai banks," he added.

The severity of the measures, including massive budget cuts, heavy tax increases and the complete opening of Thai banks to foreigners, was unquestioned, he said.

''The Thai government had a choice of doing good or bad the past year, and it did nothing, which was the 'worst option'," another foreign investment banker said.

The World Bank quickly issued a strong statement in support of Thailand's financial restructuring efforts. Five Royal decrees, which would provide a legal basis for resolving the financial sector crisis, are scheduled for Cabinet approval on Friday. ''We now look forward to the early promulgation of various decrees that would underpin the measures announced [yesterday]. We expect these decrees to provide the legal framework needed to tackle the tough issues and further strengthen investor confidence in the government's resolve to address the problems in the financial sector," Jonathan Fiechter, a World Bank director said.

Underlying the financial restructuring package is the ultimate attempt to save the Thai financial system from full meltdown. Chaiyawat Wibulswasdi, the Bank of Thailand governor, said there would be no further shutdown of finance companies or banks. The public's deposits, he said, would not be frozen as falsely rumoured. Moreover, a Royal decree would be issued to guarantee both the depositors and creditors of the remaining 33 finance companies and 15 banks, he said.

Although the economy has not bottomed out as yet ­ which can be seen from the fact that non-performing loans in the finance and banking system will not peak until the middle or fourth quarter of next year and by the current account deficit target, which will be shrinking further from this year's five per cent to three per cent cent of gross domestic product next year ­ investors can now see where Thailand's policies are heading.

On the fiscal side, Thailand has shown its willingness to bite the bullet. Sovereignty over management of the budget and other macro-economic policies has been turned over to the IMF in return for a standby credit package of US$17.2 billion to shore up the country's balance of payments crisis. But it was not until the 11th hour that Thai politicians finally made their difficult decisions.

The Cabinet yesterday approved a painful fiscal consolidation by a combination of Bt130 billion in spending cuts from its 1998 budget and by slapping on a luxury tax to raise Bt40 billion in additional revenue. The objective is to meet the tough macro-economic target, as prescribed by the IMF, of a budget surplus of one per cent of GDP.

Proceeds from the budget surplus of about Bt69 billion a year will be used exclusively as reserves to bail out the financial system. Finally, taxpayers will have to foot the bill of the financial crisis.

Fiscal tightening is one of the conditions the IMF put on the Thai government. If an austere fiscal programme is strictly followed, it will restore confidence and restore Thailand's macro-economic health. Economic growth is targeted at 2.5 per cent this year against 3.5 per cent next year, although there will be severe economic dislocations along the way during this painful adjustment period.

The restructuring package will in effect put Thai finance companies and Thai banks up for sale. Thailand will become the most liberalised country ­ several steps ahead of the World Trade Organisation's agreement on financial services liberalisation ­ in the region with regard to opening up the playing field to foreign banks.

The new regulation will allow foreign investors or banks to hold up to 100 per cent in Thai finance companies or banks for 10 years. A grandfather clause will be provided so that foreigners can still hold on to their stakes beyond that period with the stipulation that they will not participate in further recapitalisation, which will automatically dilute their holdings until their stake falls below 50 per cent.

Opening up the banking sector to foreign banks amounts to an admission by Thai officials that the gravity of the problem is beyond their ability to resolve. Both Finance Minister Thanong Bidaya and Bank of Thailand Governor Chaiyawat Wibulswasdi have obviously avoided discussing the level of non-performing loans in the system and the cost of solving the problem, either through private or official funds.

Spending public funds from the budget to bail out the 58 suspended finance companies from their bad debts will be the responsibility of the Financial Restructuring Agency (FRA) and the Asset Management Corporation (AMC), which will receive initial capital of Bt500 million and Bt1 billion, respectively. The FRA will look after the graduation procedures for the 58 finance companies, some of which might struggle to stay alive although they need to raise massive capital to qualify. Acting as a ''bad bank", the AMC will focus specifically on buying out the bad assets from the suspended finance companies for resale.

The good assets of the 58 finance companies will be lumped together through mergers. If the size reaches Bt150 billion, the merged assets may qualify for a bank licence. If less than that, the FRA will consider giving a super finance licence.

The task of supervising the remaining finance companies and banks and keeping them healthy is crucial. On this front, a Royal decree amending the Bank of Thailand Act will empower banking regulators to tackle any ailing financial institution in a speedy fashion, without having to wait for shareholders' approval.

Looking ahead, non-performing loans in the system will soar with a further deterioration of the economic situation. Analysts have already projected that non-performing loans in the finance sector could peak at 25 to 30 per cent compared to 20 per cent for the banking sector. A non-performing loan level of 17 per cent is already critical, putting financial institutions at risk of further lending if there is no write-down of bad debts or a rebuilding of new capital.

Banking regulators will be supervising the remaining financial institutions closely to make sure they maintain sound and strong operations. This will require the institutions to refrain from dividend payments over the next 12 months, maintain healthy shareholders' equity, recapitalise to cope with the capital adequacy ratio and seek foreign partners or merge with stronger institutions.

New loan classifications and provision rules will be applied to meet international standards by 2000. Beginning next year, banks will stop accruing interest income for any loans that miss payments for six months from the present 12-month guideline. For non-performing loans with collateral backup that miss a payment of more than six months, banks will be required to set provisions for loan loss at 15 per cent of the amount compared to 20 per cent for finance companies.

Chaiyawat indicated that if finance companies or banks fail to follow these guidelines in the coming months, regulators would move swiftly to ensure that they follow the rules by requiring them to write down their bad debts from their books by reducing capital and recapitalising with fresh money back to the capital adequacy ratio standard.